Trends in Early Retirement

The median age of retirement declined in the United States during the latter half of the last century. According to the U.S. Bureau of Labor Statistics, in the period 1950?1955, the median age of retirement was 66.9 for men and 67.7 for women. By the period 1990?1995, it was 62.7 for men and 62.6 for women. The median retirement age is projected in to be 61.7 for men and 61.2 for women during 2000?2005.

The rules for benefit recipiency from the Social Security system and private-sector defined benefit plans help explain this trend in the decline in the median retirement age.

Social Security

A worker may start receiving Social Security retirement benefits beginning at age 62. Workers who opt to receive benefits at age 62 receive a lower benefit than those who start receiving benefits at the normal
retirement age. The normal retirement age depends on the year of birth. For those born in 1937 and before, the normal retirement age is 65. For those born in 1938?1942, the normal retirement age gradually increases from 65 years, 2 months to 65 years, 10 months. For those born in 1943?1954, it is age 66. For those born in 1955?1959, the normal retirement age gradually increases from 66 years, 2 months to 66 years, 10 months. For those born in 1960 and later, it is 67.

The Social Security benefit is reduced by 20 percent for workers born 1937 or earlier who start taking retirement benefits at age 62. For those born in 1938?1959, the benefit reduction ranges from 20.83 percent to 29.17 percent. For those born in 1960 and later, the benefit reduction is 30 percent.

According to data from the Social Security Administration (SSA), in 1999, the benefits of 72.1 percent of all retired workers receiving benefits from SSA were reduced because of early retirement. This portion has steadily increased over time, from 2.2 percent in 1950 to 11.8 percent in 1960, 45.4 percent in 1970,
62.2 percent in 1980, and 68.4 percent in 1990.

Ad hoc adjustments to Social Security benefit payments in 1969 and 1971 and the 1972 Amendments to Social Security, which increased benefit payments by 20 percent, had the effect of increasing the average real benefit payment by 46.2 percent from 1970 to 1980. This unanticipated increase in retirement benefit payments is one of the possible reasons for the decline in labor force participation rates of males ages 55?64.

The 1977 Amendments to Social Security changed the benefit formula used by Social Security. Prior to 1977, a worker who retired before age 62 experienced a substantially larger reduction in benefits than one who retired at age 62.

Defined Benefit Plans

Changes in defined benefit (DB) plan design over the years had the effect of encouraging early retirement. Data gathered by the Bureau of Labor Statistics on DB plan design in 1963 and again in 1983 showed the percentage of workers who were in a plan that permitted retirement with full benefits at age 60 or earlier increased from 8 percent in 1963 to 47 percent in 1983. In 1963, 75 percent of participants were in a plan that allowed retirement with reduced benefits before eligibility for full benefits. This percentage increased to 97 percent by 1983.

According to data from the New Beneficiary Survey sponsored by the SSA in early 1982, approximately half of the males who retired in the 1970s did so with a DB pension benefit.

A DB plan enables an employer to offer an early retirement incentive or subsidy. If the employer needs to reduce its work force for economic reasons, i.e. during an economic slowdown, this offer makes it possible to cut the work force at a reduced cost to employee morale and the corporation?s public image.

Future Trends

One of the most significant developments in employee benefits over the past 20 years has been the decline in the number of DB plans. In 1975, there were 103,346 private-sector DB plans. This number increased to a peak of 175,143 in 1983. After 1983, the number of private-sector DB plans fell steadily to 59,499 in 1997.

The percentage of the work force covered by a private-sector DB plan has declined steadily since 1975. In
1975, 43.7 percent of private nonfarm wage and salary workers were covered by a DB plan. This declined to
22.3 percent in 1997.

While DB plans have declined, defined contribution (DC) plans have increased. In 1975, there were 207,748
DC plans; by 1997, that number has increased to 660,542. In 1975, 18.0 percent of the private nonfarm wage
and salary work force was covered by a DC plan. That increased to 46.2 percent in 1997.

Given that retirement benefits under a defined contribution approach primarily are a function of investment
performance, it is difficult for an employer that sponsors a defined contribution plan to influence its
employees? retirement age, compared with an employer that sponsors a defined benefit plan. For example, in
a sustained bull market, employees may find that they have sufficient funds to retire earlier than they had
originally planned; however, stock market performance would not impact the retirement wealth of defined
benefit participants (even though it may have an impact on their nonpension wealth).

In the 1960s, the labor force grew at an average annual rate of 1.7 percent; in the 1970s, 2.6 percent; and the
1980s, 1.6 percent. These changes can be attributed to two demographic changes in the work force over those
decades: the 1960s mark the time when both the baby boom generation started entering the work force and
women were entering the work force in large numbers. By the mid-1980s, all of the baby boomers were of
working age and nearly 65 percent of women age 16 and over were in the work force. The generation follow
ing the baby boomers is much smaller. By the end of the 1990s, labor force growth rate had declined to
1.1 percent annual average for the entire decade of the 1990s). Competition for skilled workers will increase
in the future.

The impact of potential Social Security reform on future retirement patterns is not known. There is a
question whether the introduction of individual accounts in Social Security?given a strong investment
environment?would contribute to the downward movement in the average age of retirement. Alternatively, a
weak or negative investment environment may force many workers to delay retirement.